Strategic Education Inc (STRA) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. And welcome to the Strayer Education, Inc. Third Quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS.] At this time, I would like to turn the conference over to Sonya Udler, Vice-President of Corporate Communications for Strayer Education. Please go ahead.

Thank you Operator. Good morning. With us today to discuss the results are Robert Silberman, Chairman and Chief Executive Officer for Strayer Education, and Mark Brown, Senior Vice-President and Chief Financial Officer.

For those of you who wish to listen to the conference via the Internet, please go to www.strayereducation.com, where the call will be archived for 90 days. If you are unable to listen to the call in real time, a replay will be available, beginning to day at 1:00 p.m. Eastern time, through Monday, October 31. The number for the replay is (888) 203-1112, pass code 365652.

Following Strayer’s remarks, we will open the call for questions and answers. Please note that today’s press release contains statements that are forward-looking, and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act.

The statements are based on the Company’s current expectations, and are subject to a number of uncertainties and risks that the Company has identified in the press release, and that could cause the Company’s actual results to differ materially. Further information about these, and other relevant uncertainties, may be found in the Company’s annual report on Form 10-K, and its other filings with the Securities and Exchange Commission.

And now I’d like to turn the call over to Rob. Rob, please go ahead.

Thank you Sonya. Good morning ladies and gentlemen. As is our custom, I’d like to begin this morning with just a brief overview of our Company and our business model, for any listeners who are new to Strayer. I’ll then ask Mark to report on the detailed financial results for the third quarter, after which I’ll comment on our enrollment results for the fall term, provide an update on our growth strategies and, since it’s our fourth quarter, we’ll talk about the earnings outlook not just for the fourth quarter, but for the full year 2005, as well as some updates to our model for 2006.

Strayer Education, Inc. is a for profit education service company, whose primary asset is Strayer University, which is now over a 27,000 student, 35 campus, post-secondary education institution, which offers associate’s bachelor’s and master’s degrees in business administration, accounting, information technology, public administration, and education.

Strayer’s students are working adults. They’re returning to school to further their careers. Our revenue comes from tuition payments and associated fees from those students. Over 60% of our students are receiving Federal insured Title IV loans. Our expenses include the costs of our professors, our admissions and administrative staff, marketing expenses, and facility and supplies costs.

We currently operate campuses in eight states in the Mid-Atlantic region, as well as throughout the world -- well, we serve students throughout the world, over the Internet, through Strayer University Online. We’re serving them in all 50 states, and over 30 foreign countries through Strayer University Online. Strayer University is accredited by the Middle States Association of Colleges and Schools.

Mark, do you want to run through the financials?

Sure. Revenues for the three months ended September 30, 2005 increased 24%, to $47.1 million, compared to $38 million for the same period in 2004, due to increased enrollment, and a 5% tuition increase, which commenced in January of this year.

Income from operations rose 22%, to $9.6 million, from $7.8 million for the same period in 2004. Operating income margin was 20.3%, compared to 20.6% for the same period in 2004. Net income rose 26% to $6.4 million, compared to $5.1 million for the same period in 2004.

Earnings per diluted share rose 29% to $0.44, compared to $0.34 for the same period last year, as diluted weighted average shares outstanding decreased to $14,637,000 from $15,021,000 for the same period in 2004. Revenues for the nine months ended September 30, 2005 increased 21% to $158.5 million, compared to $130.9 million for the same period in 2004, due to increased enrollment, and a 5% tuition increase effective for 2005.

Income from operations rose 15%, to $51.6 million from $44.7 million for the same period in 2004. Operating income margin was 32.5%, compared to 34.1% for the same period in 2004, as the Company continues to invest for growth.

Net income rose 18% to $33.1 million, compared to $28 million for the same period in 2004. Earnings per diluted share rose 21%, to $2.23, compare to $1.85 for the same period in 2004, as diluted weighted average shares outstanding decreased to $14,792,000 from $15,092,000 for the same period in 2004.

At September 30, 2005, the Company had cash, cash equivalents and marketable securities of $112.3 million and no debt. The Company generated $34.9 million from operating activities in the first nine months of 2005. Capital expenditures were $9.7 million for the same period.

During the three months ended September 30, 2005, the Company spent $5 million for the repurchase of 50,391 shares of common stock, at an average price of $99.13 per share, as part of a previously announced common stock repurchase authorization.

In the third quarter of 2005, bad debt expense as a percentage of revenue remained unchanged at 2.5%, compared to the same period in 2004. Day sales outstanding, adjusted to exclude tuition receivable related to future quarters, decreased to eight days at the end of the third quarter 2005, compared to nine days at the end of the same period in 2004. Rob?

Thanks Mark. Just a couple of comments on the financials, from my perspective. The revenue growth of 24% was slightly below our model. Our seat per student ration was a little lower than expected. It was at 1.84 versus 1.88 the year before. This is mainly the effect of the increase in graduate students, part of which we had modeled in as we thought about the quarter, as the graduate students continue to increase as a percent of the total.

It also turns out we had a number of undergraduate students who took only one class for the summer term. So even though it’s only .04 seats per student, it does have an impact on the revenue growth over enrollment. And so that was the way we saw the revenue side.

On the expense side, the operating margin actually ended up being a little better than our target. We had forecast about a 50 basis point drop at the beginning of the quarter, based on the expenditures that we wanted to make in opening up the new campuses for the fall turn, and a lot of the marketing activities that we had going on. It actually ended up only being down about 30 basis points.

And that’s mostly the effect of a little better than expected bad debt expense performance, which we were very pleased with, obviously. I mean we now feel as if -- well, this is the first quarter in the last four quarters where our bad debt expense hasn’t been worse as a percentage than the year before. And so we feel like we’ve basically gotten that under control, at that 2.5% level. And now we’ll continue to look at that as we go forward, with regard to all of our growth initiatives, and decide where we’re going to manage that number to.

On the EPS, $0.44, up 29%, we got a little bit of a pick-up on both the tax rate, and a lower share count, with some share repurchases. But we basically ended up right about where Mark and I thought we were going to be at the end of the quarter. So we were pleased with that.

On the distributable free cash flow, again, we defined that as after-tax cash from operations, minus any required CapEx for our growth, which includes the new campuses. When you adjust for a cash tax benefit, which we enjoyed last year, because of some option exercises in the first nine months of 2004, our growth and distributable free cash for the first nine months of ’05 was 30%, on 18% growth in net income. So that, again, is ahead of our model. We were pleased with that.

Again, just like last quarter, the adjustment that you would make on the cash flow statement in the release, if you wanted to track, or make that calculation, is in the 2004 income taxes payable line, which would be a negative $7.2 million instead of the positive $6.2 million without the cash tax benefit.

On our balance sheet, the only real point of note, again, is the reduction above cash and additional paid in capital, resulting from our year-to-date share repurchases, which we continued in the third quarter as well.

Turning to the fall term enrollment results, we had a very solid, balanced quarter. Total enrollment increasing 16% on a year over year basis. The continuing student enrollment was up 17%, and our new student enrollment was up 15%, compared to last year. That’s about the same rate of new student growth that we had last fall as well. So we were quite pleased with that. The out of area online enrollment was up just about 40% -- just under 40%.

We think we lost about a point of growth in overall enrollment associated with the weather disruptions in September. I mean we know of a couple of hundred students or so, mostly in our out of area/online, who told us they were not going to attend this term due to those complications. But we always seem to have something going on in the fall. So we don’t make too much of that, in terms of on a going forward basis.

With regard to the student mix, our business administration and accounting degree seekers continue to account for slightly over 60% of our students for the fall term. That’s been pretty stable now for the last three or four terms, where we’re about 60% business and accounting, and about 30% IT. So that mix shift, which has been going on since really the end of 2000, seems, at least over the last year, to have stabilized somewhat.

Similar to last quarter, the new graduate programs are just over 5% of our student population. That’s our master’s in education, health services administration and public administration. That is helping to drive overall graduate student population at 26% of our student mix in the quarter. And that’s up from 23% from a year ago. So that mix shift continues, and really hasn’t stabilized, if you will. I mean it’s continuing to -- our graduate student population is growing at a faster rate than our undergraduate population.

Turning to an update on the growth strategy, which we like to do each quarter, many of you will remember that it’s based on five objectives. The first is to maintain enrollment in the Company’s mature markets. The second is to accelerate the rate of growth of new campuses, particularly in the new states. The third is to invest in and build up our online offerings. Fourth, to increase our corporate and institutional alliances. And the final objective is to look selectively at potential acquisitions and the ultimate redeployment of capital.

Just going through these one by one, on the first objective for the fall term, we were ahead of target at our mature campuses, showing 4% growth. While the mature campus students continue to exhibit a preference, particularly in some of their later terms, to take online courses. And we are continuing to manage for that desire on their part.

With regard to new campus activity, during the third quarter, we successfully opened our third Atlanta campus. Now that campus completed our planned five new campus openings for 2005. We announced today that we are increasing our rate of new campus openings in 2006 from 5 to 8. And we further announced that we will open the first two of those eight for the winter term, one in downtown Philadelphia, and another in Wilmington, Delaware, which is a state that we have just been approved in.

Now, some of the operating losses from those first two campuses for ’06 will be recognized in the fourth quarter of ’05, as we have those campuses physically open at this point, and we’re currently advertising and recruiting for students for a January 9 start of classes at both those campuses. We expect to open the remaining six locations evenly throughout the year -- two for the spring term, two for the summer term, and two for the fall.

In the out of area online unit, our adjusted growth rate, when we take into account those campuses that are open and putting students who had been online into those campuses, it was around 40%, slightly below what our target was at the beginning of the year. But, as we said, we expected that to balance out as we get larger, and that rate of growth to get closer to the overall rate of growth of the university, although it is still growing at a significantly faster rate than the university as a whole. And it’s the single biggest unit by a factor of almost three at this point.

In the area of capital redeployment, we announced this morning a doubling of our annual dividend to $1 per share. We also announced that we had repurchased approximately $5 million worth of our common stock during the third quarter. And finally, we announced that our Board has authorized an additional $20 million for share repurchases, through 2006. That brings our unused authorization to approximately $40 million through year-end 2006.

And, as I mentioned in my letter to shareholders last year, the Board and I remain convinced that this business model allows us the luxury of fully funding a strong organic growth strategy, and still make a periodic return of capital to our shareholders. And we, as a management team and a Board, every quarter weigh all uses of cash, to determine the most value-enhancing after-tax return on our owners’ capital.

Now when we reviewed and approved our 2006 operating and cash generation budgets with our Board this week, it was clear to us that, even as we used cash to accelerate the rate of new campuses starts from 5 to 8, we were still going to generate more cash. And so we were certainly in a position where we could, at the same time that we were increasing the rate of organic growth, increase our capital redeployment back to our owners.

Now on our business outlook for the fourth quarter, based on the university’s strong enrollment growth for the fall term, offset partly, as I mentioned, by accelerated expenses associated with the new campus openings in Philadelphia and Wilmington for the winter term, we estimate our fourth quarter EPS will be in the $0.98 to $1 range.

In the fourth quarter, we expect to incur about 350 basis points of margin compression, compared to Q4 of last year, almost all of which is going to be in the S&P line, to support the rollout of the new campuses. And, based on this fourth quarter forecast, we’re actually in a position to talk about the full year now, and estimate our full year EPS will be in the range of $3.21 to $3.23, and the full year operating margin will be approximately 33.5%.

Looking back over the full year, the enrollment growth for fiscal year 2005 is about 17%. We’re done with it now, so we can talk about it. And, if you think back to our description of our model last year, we said 15-18%, and I believe it was $3.20 to $3.30, Mark?

Right.

So we are in that range. We’ll pick up or we’ll lose -- we’ll invest about $0.03 in this fourth quarter, accelerating the ’06 campus openings into the winter term. So basically, well within the range of what we talked about, thinking about, in terms of looking at our business model in ’05.

Now, looking ahead to ’06, we provided this morning an update to the operating model, which gives effect to the costs that are associated with going to eight new campuses next year. And with the notional 15-18% enrollment growth, and assuming a continued shift in our student population to graduate students, we don’t really have a lot of ability to forecast this.

But Mark and I have looked at what it did in the last year or two, and just continued that trend going forward. We would expect an 18-21% revenue growth in ’06, and an operating margin, which would compress down to the 32.5% to 33% range. It’s not quite as much of a compression, because we’re taking a little bit of that hit in the ’05 timeframe, given the scheduled campus openings.

And this would lead to earnings per share on this notional model in the $3.75 to $2.90 range, based on that 15-18% enrollment growth. Now obviously if we have higher enrollment growth, our EPS will be at the upper, or outside of the upper end of that range. And if we have lower, it would be lower by the same amount. But we wanted to give our owners the same view we have as to the levers in the operating model, so as we go through the year and announce our enrollment results, you’ll be able to see the same things we do.

And with that Operator, we’d be pleased to answer any questions.

[OPERATOR INSTRUCTIONS.] Howard Block, Banc of America Securities.

Good morning. This is actually [Matt]. Howard had to jump on a call real quick.

So he’s in serious trouble. So go ahead [Matt].

I’ll let him know you’re not pleased with him. I know in the past you’ve said that human capital is really the primary gating factor to being able to open more than five campuses this year. I wondered if you could talk a little bit about what might have changed, in your opinion, to allow you to open an incremental three campuses, if you’ve instituted better training programs, or perhaps brought in some management from the outside.

Well, there’s really three things. The first is, by keeping the rate of growth at five for three straight years, and running our training programs in each year, and building the base of existing campuses and existing places that we’re drawing our campus leadership from, we’ve just, necessarily, built up a deeper bench strength. And that was one of the reasons that we did it. And so we’re very pleased with that.

We did bring in some senior managed operational management from the outside earlier this year. And that’s given me a higher sense of confidence in our ability, along with all of our strong regional directors, to execute a higher rate of new unit growth.

And then finally, and I think probably most importantly in this, we set up, at the beginning of the year, a separate tiger team, if you will, for opening up new campuses. And it’s run by a very talented woman, who has been both a campus dean and a director for us. And she’s got a small but energetic group, that is going around the country and actually handling the opening of the campuses.

So, our existing regional directors are not distracted by the significant investment of time and effort to get this campus open. By doing that, and building off of the larger bench strength that we think we have, we were very comfortable that we could handle this. We wouldn’t have done it, if we didn’t feel like it was well within our operational control to manage it. And, as I’ve said in the past, we’re not really constrained by either market opportunity or financial capital. So we tend to try and push this as hard as we can, consistent with executing on the operational side, and maintaining the academic quality of each of the units.

Thank you. And I wondered, can you speak -- if not specifically, maybe directionally -- about the other six campuses, if you can, to let us know where they might be? Will it be new states? Or just deepening the footprint in current states you’re in?

Well, our preference, our inclination, is always to spread the flag as wide as possible, as quickly as possible, at the same time understanding that we’ve got unmet demand in a lot of existing markets. And the managers in those markets are generally pounding the table pretty hard, asking for more opportunity.

I would guess it’s probably going to be sort of half and half. I mean if you look at this winter term opening, we have one in a brand new market, and one in an existing market. I don’t know that it will be like that, evenly throughout the whole year. But I do feel as if, given the opportunities that we have, in the markets that we’re looking at, probably half and half is a pretty good estimation.

Thanks very much. And one just quick follow-up, and I’ll be done here. Considering that the students at the mature campuses are taking more classes online, have you considered using less space for your new campuses going forward?

We are.

Definitely are.

Yeah.

Alright. Thanks very much.

Greg Cappelli with Credit Suisse First Boston.

I guess just first off, for modeling purposes, on the eight new schools, I am assuming that you guys remain comfortable with sort of the using the historical enrollment ramp. I think it’s about 150 students at year one. It goes to kind of 300 in year two. Any reason to deviate from that at all?

No.

Okay great. And then just on the free cash flow front, given your guidance for ’06 overall, would you expect to be $50 million plus, somewhere in that neighborhood, in free cash in ’06 Rob?

Yes.

Okay. These are easy one word answers. See how easy I’m keeping this?

Mark and I are fighting to get the answer out.

Now I’m going to force you to answer a longer answer. No, I have one other.

Sure.

Sort of bigger picture here, when you think about the broader market opportunity for you, given where you -- what you’ve focused on working adults, and obviously there’s been some discussion about how it’s a little more difficult for companies to follow, with their size, going after the 35 year old markets.

You look at demographics, the youngest baby boomer is 42 now. Average age of students might be in the mid-30s for the sweet spot, for working adults. What are your thoughts? I know there’s a significant size difference for you guys. And then, do you eventually decide to maybe start looking at younger students, with fewer credit hours as well, coming to Strayer?

Well, at the point at which I do Greg, I will have considered the management team here a remarkable success, in the same way that Apollo has been. When you reach that kind of scale, I think it’s an entirely appropriate conclusion to go to, that you want to use your educational assets to create returns for your owners. And you look at the best way to do that.

We’re not even close to that at this point, from the standpoint of fully prosecuting or executing on the opportunities that we think we have in front of us. And it’s difficult. It’s challenging to open new campuses in new markets, and grow the online, even with the markets that we know so well, which is educating working adults.

And so we’re unlikely to deviate much from that, until we feel a if we’ve fully utilized our assets on behalf of our owners in serving that markets. And we’re only in eight states right now. And there’s quite a few others that we think that we have a really good opportunity to be successful in.

Got it. Okay. Just one final one. Any shifts of note in the sort of cost per lead or conversion rate this quarter?

No. It was pretty stable. Our cost per lead was actually down slightly. And our cost per student acquired was just about dead on even with last year. And that’s the advertising cost. Now, obviously, our S&P number is up quite a bit, because we’ve got a lot more admissions officers and admissions managers in the field with these new units.

And what happens is the output per admissions officer grows with time as the market matures, as we get the base of referrals and the effect of the satisfied graduate and alumni talking with their friends and coworkers and family members. That’s a pretty predictable and steady pattern that we’ve seen as we look back at our campuses. So that’s obviously the reason why we’re prepared to put owners’ capital to work as aggressively as we are in opening up these new markets.

Okay. Then finally, again, maybe just going off the last caller’s question, could you maybe just take a minute and help us understand, when you are -- human capital was brought up. But when you guys are thinking about expanding, and when you’re budgeting for the next year, can you just give us a little insight into the process of where you start? Are you starting with the academic people, and sort of figuring out how many, academically, how much you can take on, how many seats you need, and then you go to your marketing people? I mean how do you -- ? Just walk us briefly through that.

Sure. I mean it’s pretty straightforward. We do a management off site usually in July. And the topic is, first and foremost, what is the depth of our human capital. And we start with both the academic and the administrative side. And we run down our list of people that we think are capable of stepping up to take on a campus leadership position.

And our head of operations in our Provost University work those lists individually in their respective categories. And we come to some conclusion as to what that list is, and then take a little bit of a safety factor. So if we have 12 teams, maybe we say we’re going to do six campuses. Or, if we have 16 teams, we do 8. Whatever that -- we feel comfortable with.

We’ve never really worried about the availability of market opportunity, because we haven’t run into a situation where a market that we’re not in, assuming it has sufficient population density, hasn’t been a good market for us.

And so that latter determination, once we know how many we can do, is really based on a prioritization of where we think the need is the most, and which states we have been approved in, and which ones we feel like, after that approval, we sort of owe them politically to be in there as quickly as possible, and which ones we can delay a little bit. And then, as we’ve said many times, the financial considerations in the short term are relatively immaterial. We want to put owners’ capital to work as quickly as we can in these campuses.

Got it. That’s helpful. Thanks a lot guys.

Mark Marostica with Piper Jaffray.

I was wondering if you could comment about retention in the quarter, relative to would it normally run between the summer and fall, and what you experienced. I know it looked like the rate of growth in continuing students fell sequentially a bit. Maybe just a little color there would be helpful.

Sure. Our retention rate for the fall term, in terms of both those students who are enrolled in the summer, and then also what we consider are continuing students, also anybody who was enrolled in either the spring or the winter, but was not enrolled in the summer, but is enrolling for the fall, was almost exactly flat with the year before.

Now, we had a lot of resources, additional resources, focused on that. And so we didn’t get quite the up-tick that we had for the summer term. As I said, I think that moving students into a summer term, who otherwise were going to take a summer off, is a slightly easier exercise. So we got a bit more output out of that last quarter. And then the other thing is that I think most of the effect of the weather disruptions was around continuing students. And so, as I said, I think there’s a point or so of that.

But we think that the investments we’ve made in the retention efforts, our retention managers, our retention officers, and then on the academic side, the educational support functions -- our tutoring, our remedial English and math, our advising functions -- all are very important investments for the long-term.

And it’s kind of hard to look back and say, well, in this particular quarter, did we get the return on them. I mean it’s a longer-term investment. And, looking backwards, you might say, well, if you hadn’t had those, would it have been worse, given some of these other disruptions. We don’t really know. I mean we were quite happy with the results. And we’re going to continue to try and beef up that activity, because in the long run, improving the ability of the student to get to the program, and ultimately graduate, is what’s going to build value in the organization.

Also, relative to your plan to open up eight new campuses this year, and looking to your experience -- or next year -- and looking to your experience in this past year, how was your progression to break even this past year, as you kind of watched the campuses? And do you expect any change as we look to next year?

I don’t expect any change. And all of our ’04 campus openings are now profitable.

Fair enough. And one last question. And that’s the tax rate was a little bit lower than we were modeling. What should we be modeling for Q4 and for fiscal ‘06? Thanks.

Yeah, Mark, in the range of 38.5. Of course, it depends on a couple of factors, like state apportionment and a level of our -- the type of investment income that we earn. But we’re assuming, on average, at 38.5%.

Okay thanks. I’ll turn it over.

Matt Litfin with William Blair.

I wanted to clarify something you said earlier Rob. The 350 basis point margin hit in Q4 versus the prior year, are you saying all of that is for the two campus openings announced today? Or were there other things in there?

Much of it is the two campus openings. I think at 16% enrollment growth, you also have a little bit of the impact of the openings in ’05. The lower we are in our enrollment range, the more the costs associated with new campus openings flow through as margin compression. So there’s a mixture there. We’ll have about three quarters of a million or so of losses from those two campuses. And so you can kind of back calculate what that is in terms of margin.

Okay, I will. And in your new guidance, what are you assuming for ’06 in terms of future share repurchases?

Well, again, let me clarify that when we talk about ’06, that is a business model. It is not guidance. We don’t really know what our enrollment is going to be, nor do we intend to try and forecast it, because it’s not something that we know. But, with regard to that model, there is no additional share repurchases. And we would announce that each quarter as they happen, and give you the share count. And you can calculate from that standpoint.

Okay. One more. What are you earning on your cash currently?

Are you embarrassed to say Mark?

On a taxable equivalent yield, it’s close to 4%.

Great. Congratulations on the fall enrollment.

Richard Close of Jefferies & Co.

Great. Congratulations guys. A quick question, maybe on the selling and promotional, just trying to get a feel for it, ex maybe the new campuses that you opened this year, the ones that you’re going to open up here already in the fourth quarter. Selling and promotional would be 42%, I guess, year over year. What would that be, maybe on a mature campus base?

Well, if you take out -- it’s not just the advertising cost. But if you take out the -- because we included in our selling and promotions the salaries associated with the admissions officers, who are -- you staff up at a campus when it’s new, when they’re not producing that many new students.

If you take all of that out, it would go back at a mature campus to closer to our historical operating margins, minus corporate overhead. Want to take a guess at that Mark? I mean I -- we could take a look at it, and probably get something to you Richard. But suffice it to say that the -- if you look at where the Company’s gone in the last five years, from a period of relatively no unit growth into one where we’re aggressively adding units each quarter, our operating margins have gone from the high 30s down into the mid-30s.

And we have tried to signal that, to say that that is a cost that we’re prepared to incur, because we think that the return on our owners’ capital, the net present value of each new unit is significant. And we’re adding value over time as we do that. And so most of that 500-600 basis points of compression, versus what the Company looked like before we took over, are associated with the costs of those new campuses.

And, as the ones that we opened in ’02, for instance -- ’01 and ’02 -- are now reaching sort of full maturity and operating margin, you’re ameliorating that somewhat. But, at the same time, we’re accelerating the rate of opening new campuses. So the average age of our campus each year is going down. And our operating margin will probably go down with that, until the point at which the average age of the campuses starts to stabilize, and then go back up. And then the operating margin will go up.

But, either way, we see this as a really healthy kind of mid-30s operating margin business. And we just, based on our investment decisions, see that margin kind of tweak around an average there.

Okay. And then maybe a follow-up with respect to Greg’s question on going after a younger student, maybe taking it a little bit different approach. You mentioned the strength in the graduate recently, or over the last year. Maybe looking at the undergraduate relationship, with graduates, is there any way you could focus, maybe try to drive the undergraduate higher in terms of a growth rate? Obviously you don’t have a preference. But is that something you could possibly do?

Well, my preference is for more students. And I really don’t care that much about which way they come in. An undergraduate student who comes and stays through an undergraduate program, and stays for a graduate program, is obviously an even more valuable student. But I don’t -- we try to stay out of the circumstance of either discouraging some type of student, versus just generally setting up a reputation for a strong academic institution in the market, and hoping that we attract students who are interested in that, whether they are interested in the undergraduate or other graduate programs.

So your advertising doesn’t necessarily differentiate between going after graduate or undergraduate?

No, it doesn’t. I mean it generally talks about the whole range, because we think it’s attractive to undergraduate students to know that they’re part of an institution that offers graduate programs.

Okay. And then just one final one. With respect to lead flow, is there any -- ? Are you seeing any major differences in certain markets? At one point I know Philly was a difficult market from a lead flow, in talking with other companies. You’re obviously opening up another school there. So maybe if you could talk about softness in any markets, or strengths in any markets.

Well, Philadelphia has certainly been a great market for us. We like that, a lot. And again, lead flow for me is a less relevant statistic than students that you acquire from that lead. And we continue to get very strong lead flow in our out of area, online. And yet we also continue to have lower conversion rates of those students. And that’s been the case for the last five years. We’re not really moving the needle significantly on that, even though it is, as I said, the largest and fastest growing unit of our business, if you think about it as a business.

So there’s nothing I would characterize relative to any of the geographies. Some of them tend to have a slightly higher impact on certain types of media. Some of our markets -- we’re a little heavier in radio, some a little heavier in TV, some a little heavier in corporate outreach. But, in general, there’s nothing that I would look at in any of the markets to say that there’s a large distinction with regard to leads.

Okay. Thank you.

Gary Bisbee, Lehman Brothers.

Since I’ve harassed you, by asking the question in the past, about the dividends, congratulations on the decision to double that again.

Okay.

I guess a couple of questions if I could. Can you give us a sense how Atlanta and Philly are doing, now that you’ve been in those markets for a while, versus the experience you’ve had a couple of years ago in North Carolina and some of the other states? Has it been -- ? I know North Carolina was really strong. But has it basically been pretty close or comparable?

Yeah. I mean we like those two markets quite a bit, as evidenced by the increasing investment in them. So there’s certainly -- Atlanta is certainly at or above our notional ramp rate, as is Philadelphia.

With the out of area online continuing to put up pretty good growth there, but if you look at it in the context of some of the competitors, with 3,200 enrollments, that’s still a pretty small, compared to -- if you follow the [CECOs] [ph] of the world. I guess, how are you finding the marketing, and the ability to grow that business? You said that, overall, lead and student acquisition costs were fairly constant year over year. Is that in online as well? Or is that across the whole Company? And the second part of the question is, can you give us a sense as to what types of marketing channels you’re being most successful with, going after the out of area online?

Well, the answer to your first question is that -- my answer with regard to cost per lead, and cost per student acquired, was a general comment about the whole university. Specifically, with regard to out of area online, our cost per lead has been flat to down. And our cost per student acquired has been flat to up. And that is kind of the nature of how we see that business. We don’t do as well converting those leads as we do a student who walks into one of our campuses.

I think that’s for relatively obvious reasons. At least it’s intuitively obvious to me that a student that you see face to face, you just have a better chance of convincing of the benefits of what is an enormous personal and financial investment, in going back to school. With regard to the actual size of out of area online, we’re real happy we have 3,200 students. And we are glad that it is growing at a faster rate than anything else in our organization.

I try not to get too wrapped up around comparisons with regard to other institutions, because they’ve got different models and different objectives. For us, if we can do what I think is the most challenging aspect of an out of area online enterprise, educational enterprise, which is maintain academic quality with a student that you never see face to face, then I’ll be delighted with this rate of growth.

Okay. And to the marketing channels, can you give us a sense if that’s been successful there?

Yeah. Actually, we’re pretty -- our marketing with regard to out of area online is almost solely Internet-based. We’ve had a couple of experiments with very small kinds of either TV or other sorts of things in markets where we don’t currently have campuses. But that’s usually as a seed to a market where we are ultimately going to put a campus. So the vast majority of our marketing with regard to out of area online is just pure web-based/Internet-based.

And within that, I mean I’ve seen just here locally a lot of ads on the Roadrunner main page and stuff like that. But are you doing -- buying paid search and stuff like that as well? Or is it mostly banner ads?

We’ve done -- we’ve gone through a whole progression of using the Internet. [Lisa Lovenka] and our Internet -- our whole marketing team spends a lot of time looking at this. And, over the last several years, we’ve done direct emails, we’ve done banner ads, we’ve done paid search. We’ve done paid per lead.

And it tends to -- we find it tends to change very rapidly, that as a medium, as a media, it is fast moving. And we’re trying to stay ahead of that. So there’s not one particularly that I could tell you right now. But I would tell you that we change it quite a bit, and we try and stay ahead of it.

Okay. Thanks. I guess just two last fairly quick ones. Do you anticipate that the bump from 5-8 campuses will allow you, over time, to essentially grow your -- or set an enrollment growth target above 15 to 18? Or is that new, more campus openings, sort of necessary to continue to grow within that as we look out over the next couple years?

Well, what I think is that over time your enrollment growth, if your existing campuses perform the way that they ought to, is generally going to match your rate of capital employment. And so, 8 as a percentage of 35 is higher than 15-18. If we stayed with 8 for the next several years, it would ultimately be lower. And I think that the long-run trend line of the enrollment growth is going to match that.

Okay. And then just a last one. Does it make sense, now that you’ve had a bunch of schools that you’ve opened under your tenure that are falling into the mature campus space, to increase your guidance from -- or your goal, I should say, from flat to slight growth there? Or are we seeing trends in the older D.C. campuses or any of those that are actually shrinking, but that flat is still the realistic goal? Thanks.

That’s a fair question. The reality is that we should get a little bit of growth out of the mature markets, if we continue to define them as four years old and older. When the market reaches a plateau or a full maturity, it’s generally closer to kind of 6-8 years. And then, at that point, we’re happy with maintaining an enrollment level at those campuses. But at that point, you’re also generating 5%-ish of revenue growth per student, as well as very, very healthy operating margins. So those become just enormous cash generators to support the rest of the business.

Okay, thanks.

Corey Greendale with First Analysis.

Just a couple questions. First of all, on the G&A line, that was down a bit from the June quarter to the September quarter, just a dollar amount, which is not unprecedented. But it’s unusual. What led to that?

I think we got rid of Mark’s salary. I don’t know Mark. Do you know?

Not off the top of my head.

We’ll have to check that and get back to you Corey.

Second question, getting back to Richard’s question a little bit about the S&P, I was just wondering, have you changed the overall compensation levels for recruiters? Or the model, in terms of the number of recruiters that you would have in a mature campus?

No. I mean our compensation levels for recruiters, like the rest of our organization, are designed to match what’s necessary to attract and retain the best people we can get. But there’s not any substantive change to how we’re doing that.

So if we think of that as kind of inflation level increases, that’s about right?

Yeah. I think that’s right.

And then I was just wondering what the timing and the magnitude of the price increase you baked into your ’06 model would be?

5%, January 1.

Okay. And then one quick clarifier. I don’t think you meant this Rob. But when you said earlier about spreading the flag as widely as possible, as quickly as possible, you didn’t mean getting away from the kind of adjacent states?

No. You’re absolutely right Corey. I meant that in the context of picking off adjacent states.

Okay good. I’ll turn it over. Thank you.

Mark Hughes with Sun Trust.

Thank you very much. The three quarters of a million for pre-opening expenses, is that per campus, or both campuses?

Both Mark.

Okay. And then any change in lead flow or conversions in the month of September? You had mentioned some direct effect from the hurricane. But any change in September trends otherwise?

We were a little softer in September across the board, although I thought most of the impact was on our continuing students, at least the ones that we could identify with regard to the weather disruptions.

I think that, particularly in some of our southern markets that were close to the Gulf Coast -- I mean we don’t have anything in New Orleans, but Memphis, Nashville, Charlotte, Atlanta. We did hear of a lot of families that were taking in family members that were part of the diaspora there from New Orleans.

And I think peoples’ attention was a little distracted in September because of that. But I don’t -- I mean as I said before, it seems like every year that I’ve been here, we’ve had some either terrorist attack, hurricane, sniper or something in September. So it’s kind of -- it’s hard to really point and say that that’s a significant impact one way or the other.

Got you. Thank you very much.

[Corey Johnson] with Canal Capital.

Can you just be a little more clear on what the cause of the increase in marketing expenses were? But is there anything besides paying more to the people who work there, particularly we’ve seen a lot of bumpiness in the expense of leads and the source of those leads in the last year.

Well no, it’s not related so much to paying more to the people who work there, because we haven’t -- I think as somebody just asked -- we haven’t changed our actual salary. What we’ve done is, in opening new campuses, you hire a lot more of those individuals who don’t produce offsetting revenue right off the bat, because of the rate at which these campuses grow.

So, if you’re opening a new campus, you’re going to have a large amount of un-recovered selling and promotion expense associated with the salaries of the admissions officers, and the marketing expense, the advertising expense, in that market. And that’s essentially what’s going on.

So the leads have not gone up.

No, I’ve said that three times.

It’s welcome news. And finally, you said you’re going to open up two campuses every quarter. We would expect this marketing expense to kind of stay flat with where it is right now?

It depends on the market that we go into. And, as a dollar amount, it won’t stay flat, because you’re adding new markets each time. As a percent of revenue, it’s hard for me to calculate at this point. A lot will depend on the early activities of those campuses, how much revenue is generated there. And then, as I said, we haven’t made decisions on the latter half of the year, as to where those vocations are going to be. And, depending on whether or not they’re in new expensive markets, versus existing less expensive markets, it could have an impact as well.

And finally, what is the most competitive market you see right now in your existing business?

I would say it’s out of area online. That’s the one where we have the least competitive advantage, and that we are focused on dealing with things that are more difficult than situations where you’ve got a physical presence and personal interaction with the students.

So I guess I should have been more specific in my question. In terms of physical locations on campuses, what’s your most competitive market right now?

We don’t really comment on markets by geography.

Thank you.

Jerry Herman of Legg Mason.

Rob, the $750,000 in pre-opening, is that above normal? Is that greater than normal?

No, it’s actually right on. If you look at our -- I think our investor day presentation from a year or so ago, we lay out a notional expenditure, in Q minus 1, Q and Q plus 1. And it’s right on point there.

Okay. With regard to the business model that you discussed in the release, it looks like you’re expecting a continuing mix shift to grad students. And you mentioned pricing of 5%. The question is really about pricing. Are you guys seeing any change in elasticity of demand, or anything that would suggest that price increases are going to proceed at a lower rate in the future?

We have not Jerry. And we look at that pretty closely, obviously. There’s two things that affect it -- or three things that affect it. One is, and I think the most important is, is education continuing to increase as a factor of production in the economy. Are you continuing to shift from a manufacturing base to a knowledge-based economy?

And all the evidence that I see suggests that is certainly the case. I mean you look at the Delphi bankruptcy, and all of the discussion of heavy manufacturing companies that are dealing with significant pension liabilities. I mean the $80 an hour metal bending high school graduate level jobs in this country just aren’t going to be here. I mean that’s a transition that’s not going to stop.

And so, because of that, I think that as long as education increases in value as a factor of production in the economy, you’re going to be able to generate or capture pricing power associated with that. Now, when you get down to micro level, there’s a couple of things going on.

One is, again, we’re serving, an average student of 35. They, to date, have shown us the ability to find the credit or the capital necessary to go back to school. And so we really haven’t seen that as an issue. The one area that we’re sort of focused on, frankly, is the cost of education, which is outside our control, which is the textbooks.

And I think some of the other players that have a little more scale have been probably more proactive and effective, that getting some of that under control, and that’s something we’re going to have to do, because we can’t let an extraneous part of the cost structure, for which we get no benefit, continue to raise their cost at a level well above the rate of inflation, and well above our rate, without having it affect our students’ ability to participate. And so we’ve got a couple of things going on, to try and get that more under control. But that’s about the only place where we’ve heard a lot of squeaking.

And, as a follow-up, obviously the folks in Phoenix have talked about lowering prices on some of the online programs. You’re out of area or online is your most competitive market. Are you seeing anything there, notwithstanding what’s going on at WIU, from a price competitiveness point of view?

Well, I mean it’s -- I think it’s more competitive, because it’s more difficult to sustain a competitive advantage, to sustain a relationship with the student. I don’t see any real issue with regard to pricing. As a matter of fact, we’re priced well below everybody else in the out of area -- in the online. So I think from that standpoint, I’d agree there’s a price war. We’re already winning that. I don’t expect that to be a situation going forward, because I think whether the education is online or in the classroom, it’s valuable to the student. And that’s the way the pricing ought to reflect.

Two more quick ones if I can. How about turnover in campus management Rob? Are you seeing any changes there?

We’ve been pretty stable over the last six months. And that’s a big reason, I think, for both operational performance, and our ability to expand our rate of growth.

Great. And finally, an easy one for you Mark, can you help us allocate where the FAS 123 costs are going to hit the P&L for ’06? Predominantly G&A?

Well, we did it separately. Right?

Yeah. We haven’t decided, Jerry, how we’re going to report it next year. Obviously we’re going to adopt FAS 123 in the first quarter of next year. But we haven’t decided how we’re actually going to report that yet.

I mean I think I like the way I’ve seen some people do it, as just a separate line item, equity compensation, because it makes it easy to see it, both it’s impact, and then also what the -- since we’re mostly focused on cash generation on a diluted basis, it’s also the best way to track that too.

Okay great. Appreciate it guys. Thanks.

[OPERATOR INSTRUCTIONS.] [Trey Callway] with Stanford Group.

Quick question on the classes per student ratio. As far as it relates to the fourth quarter of ’04 last year, or your fall ’04 term, do you know what that number was, by chance?

Do you have that? I think it was like 1.9. It’s a little higher in the fall than it is in the summer.

So --

But I guess to answer the question before you ask it, we are expecting a diminution on that, based on the 26% graduate students, versus 23%.

Okie-doke. And then, with respect to the 8 campuses being opened next year, what do you expect as far as whenever those campuses reach maturity, about how many students will be in each campus?

Well, our notional model is that these campuses grow to about 1,000 students over a sort of 7-10 year period.

So there’s no -- ? And that’s pretty much going to be the average across these 8? Nothing swinging it one way or another, as far as going into a smaller market or bigger market?

Well, let me answer it this way. I don’t even predict next quarter. So I sure am not going to predict 7 years from now. I don’t see anything different about the markets that we’re going into, versus any of the other ones that we’ve been in already. So our notional model is what we’re planning on.

Great. And then with respect to retention specialists, can you give us an update there as far as, from a couple quarters back, you had sort of tinkered with that a little bit. And what you’re seeing, going out into the next year?

We like the operational structure we’ve put in place. And we intend to maintain it, and, frankly, improve on it, as we standardize and make a lot of our procedures more replicatable, which is going to support a rapidly growing institution.

Okay. And then, just finally, more of a big picture type question. When you look at the reauthorization of the Higher Education Act, and it’s likely to come next year, what’s you all’s thoughts on it, being so close to the debate itself?

Well, we’re physically close. I wouldn’t say that we’re very intellectually close. Our planning scenario is that the regulatory structure that we have in place right now is not going to change appreciably, either negatively or positively. I mean I’ve heard a lot of things that suggests that there’s at least moderate improvements that are being discussed right now in both the House and the Senate Bill. But it hasn’t really changed our view of the structure that we operate in.

Okay great. Well thanks a lot gentlemen.

No further questions. I will turn the conference back over to management for any additional or closing comments at this time.

Thank you Jamie, and thanks everybody for participating. We’ll look forward to talking to you again next quarter. Thank you.